Answer: carry benefits increase.

## Explanation The carry arbitrage model states that: \[ \text{Forward Price} = \text{Spot Price} \times (1 + r)^T + \text{Carry Costs} - \text{Carry Benefits} \] Where: - r = risk-free rate (financing cost) - T = time to expiration - Carry costs = storage, insurance, etc. - Carry benefits = dividends, convenience yield, etc. **Analysis of each option:** **A: Carry costs increase** - INCORRECT - When carry costs increase, forward prices should **increase**, not decrease - Higher storage/insurance costs make holding the asset more expensive **B: Carry benefits increase** - CORRECT - When carry benefits increase (e.g., higher dividends), forward prices **decrease** - Higher benefits make holding the asset more attractive, reducing the forward price **C: Financing costs increase** - INCORRECT - When financing costs (risk-free rate) increase, forward prices should **increase** - Higher opportunity cost of capital increases the forward price Therefore, the correct answer is **B** - forward contract prices decrease when carry benefits increase.

Author: LeetQuiz Editorial Team